SCOTUS sides with conservative radio host Jarkesy in case fighting SEC ruling

Jun 27

Simone Del Rosario Business Correspondent

By Simone Del Rosario (Business Correspondent), Brent Jabbour (Senior Producer), Emma Stoltzfus (Editor)

A conservative radio host took on the Securities and Exchange Commission (SEC) and won. The Supreme Court Thursday, June 27, ruled 6-3 in favor of George Jarkesy, who was charged with securities fraud and ordered by an SEC judge to pay a civil penalty of $300,000.

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Jarkesy appealed, claiming the SEC violated his Seventh Amendment right to a jury trial by deciding his case using an in-house judge, known as an administrative law judge (ALJ). These are judges in the executive branch, not the judicial branch. They are employed by the agency bringing the charges.

The argument for ALJs across government is that they’re specialized judges in that field. But remember the saying, “the house always wins.” A Wall Street Journal analysis from 2010 to 2015 showed the SEC won 90% of cases before its in-house judges and just 69% before federal court judges.

“I think it’s, honestly, a cheap default by the SEC,” said Stephen Best, an attorney at Brown Rudnick who successfully defended Mark Cuban against the SEC’s insider trading claims.

Straight Arrow News interviewed Best following the Supreme Court’s oral arguments in the Jarkesy case.

“I think that it was a ghost that nobody really focused on until after the Mark Cuban insider trading case,” Best said. “And when the SEC had incredible difficulties accommodating the requirements of the U.S. District Court’s rules on discovery and trial practice, they ran back to their home at the ALJ.”

The Jarkesy case had the potential to upend the court system. There are more than twice as many ALJs as federal judges. Had the Supreme Court ruled the use of ALJs as a whole is unconstitutional, this would have flooded the courts with cases.

“The floodgates are about to open up and that’s what the Supreme Court’s worried about,” Best said at the time. “And so they’re going to be very careful in tailoring their opinion, but nonetheless, however careful they’re going to be, it’s still going to leave room for interpretation.”

At last count by the U.S. Office of Personnel Management, there are more than 1,900 ALJs across federal agencies. Eighty-six percent of them deal in Social Security cases. Just five judges come from the SEC as of 2017. In Thursday’s decision, the Supreme Court was careful to keep its ruling specific to that house, and even more narrowly, to fraud cases.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John Roberts wrote in the majority opinion. “Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.”

“Beyond the majority’s legal errors, its ruling reveals a far more fundamental problem: This Court’s repeated failure to appreciate that its decisions can threaten the separation of powers,” Justice Sonia Sotomayor wrote for the dissent. “Here, that threat comes from the Court’s mistaken conclusion that Congress cannot assign a certain public-rights matter for initial adjudication to the Executive because it must come only to the Judiciary.”

This likely isn’t the last time the issue of ALJs will come up. Facebook parent company Meta sued the Federal Trade Commission last year challenging its use of the in-house justice system, also claiming it violates the company’s right to a trial jury.

Tags: Constitution, Federal Trade Commission, Insider Trading, John Roberts, jury trial, Mark Cuban, Meta, SCOTUS, Securities and Exchange Commission, Social Security, Sonia Sotomayor, Supreme Court, trial, U.S. Congress

Simone Del Rosario: A conservative radio host took on the Securities and Exchange Commission and won. The Supreme Court Thursday ruled 6-3 in favor of George Jarkesy, who was charged with securities fraud and ordered by an SEC judge to pay a civil penalty of $300,000.

Jarkesy appealed, claiming the SEC violated his Seventh Amendment right to a jury trial by deciding his case using an in-house judge, known as an administrative law judge, or ALJ.

These are judges in the executive branch, not the judicial branch. And they are employed by the agency bringing the charges.

The argument for these ALJs across government is that they’re specialized judges in that field. But you know the saying, the house always wins?

A Wall Street Journal analysis from 2010 to 2015 showed the SEC won 90% of cases before its own judges, and just 69% before federal court judges.

Stephen Best: I think it’s a, honestly, a cheap default by the SEC.

Simone Del Rosario: When this case first came before the Supreme Court, I interviewed Stephen Best, an attorney who successfully defended Mark Cuban against the SEC’s insider trading claims.

Stephen Best: I think that it was a ghost that nobody really focused on until after the Mark Cuban insider trading case. And when the SEC had incredible difficulties accommodating the requirements of the U.S. District Court’s rules on discovery and trial practice, they ran back to their home at the ALJ.

Simone Del Rosario: This case had the potential to upend the court system as we know it. There are more than twice as many ALJs as federal judges. And had SCOTUS ruled the use of ALJs as a whole is unconstitutional, this would have flooded the courts with cases.

Stephen Best: The floodgates are about to open up, and that’s what the Supreme Court’s worried about. And so they’re going to be very careful in tailoring their opinion, but nonetheless, however careful they’re going to be, it’s still going to leave room for interpretation.

Simone Del Rosario: At last count, there are more than 1,900 ALJs across federal agencies. Eighty-six percent of them deal in Social Security cases. Just five come from the SEC. And SCOTUS was careful to keep its ruling specific to that house, and even more narrowly, to fraud cases.

In the majority opinion, Chief Justice John Roberts writes: A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator. Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.

In the dissent, Justice Sonia Sotomayor writes: Beyond the majority’s legal errors, its ruling reveals a far more fundamental problem: This Court’s repeated failure to appreciate that its decisions can threaten the separation of powers. Here, that threat comes from the Court’s mistaken conclusion that Congress cannot assign a certain public-rights matter for initial adjudication to the Executive because it must come only to the Judiciary.

This isn’t the last we’ll hear of ALJs. Facebook parent company Meta sued the Federal Trade Commission last year challenging its use of the in-house justice system, also claiming it violates the company’s right to a trial jury.

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